Donut Holes: How Much is that Prescription in the Window?

The Wall Street Journal reports that the Center for Medicare and Medicaid Services (CMS) has “finalized a rule meant to curb an industry practice that has inflated drug costs for some patients with Medicare drug coverage.”

The new rule regards the way that one calculates the cost basis for Medicare prescription drug benefits for the purposes of reaching the initial cap on coverage. This initial cap on prescription benefit coverage can result in what CMS refers to as “the coverage gap” or what is often referred to as the Medicare Part D “doughnut hole.”

The Dallas Morning News has offered this explanation of “the doughnut hole”

Seniors with Medicare's standard drug benefit for 2008 pay the full price once their total drug expenses – both Medicare's costs and their own out-of-pocket deductibles and co-payments – reach $2,510.

They are then on their own for the next $3,216, until their total drug spending exceeds $5,726. At that point, catastrophic coverage kicks in, and Medicare pays 95 percent of their drug costs.
Some seniors are able to avoid the doughnut hole because they qualify for extra government help or buy extra insurance. But everyone else has to mind the gap, which lawmakers included in Medicare's drug benefit to hold the line on federal costs.

The WSJ Health Blog reports that in 2009, “The coverage gap will open up after beneficiaries and their drug plans have spent a total of $2,700 on medications…. Seniors are then on the hook for the next $4,350.”

In response to that expense, the Kaiser Foundation has shown that many seniors cease or diminish the use of their medications.

The new rule, which will go into effect on January 1, 2010, alters the price basis for how the initial cap amount is met (in 2007 the initial cap was $2,400, in 2008, $2510, in 2009 it will be $2,700, and in 2010, presumably, it will be somewhat higher than that).

WSJ explains that at present the cost of a Medicare beneficiary’s prescriptions for initial cap purposes are not calculated as the amount that was paid to the pharmacy which dispenses the drugs, but by the amount which insurers paid to pharmacy benefit managers (PBMs) who function as administrators of prescription plans and middlemen between insurers and pharmacies.

PBMs may “lock in” a drug price with insurers, and then often negotiate with pharmacies for a lower price. The PBMs then keep the brokered difference. According to WSJ, “the size of that difference is typically secret.” At present, the higher amount the insurers pay to the PBM is the amount that is used to calculate a Medicare beneficiary’s cap calculation. As such, the higher rate can get beneficiaries to the cap—and the subsequent coverage gap— quicker.

WSJ reports that "Under the new rule, plans can still use the lock-in approach. But the amount paid to the pharmacy -- not the higher price paid by the insurer -- will have to be what is used to determine patients' pace to the doughnut hole."

The New York Times reports that “President-elect Barack Obama said Wednesday that overhauling Social Security and Medicare would be “a central part” of his administration’s efforts to contain federal spending….”

At present, Medicare is itself unable to negotiate drug pricing. In Obama’s campaign health plan, he stated that he would

Allow Medicare to negotiate for cheaper drug pricing. The 2003 Medicare Prescription Drug Improvement and Modernization Act bans the government from negotiating down the prices of prescription drugs, even though the Department of Veterans Affairs' negotiation of prescription drug prices with drug companies has garnered significant savings for taxpayers. Barack Obama and Joe Biden will repeal the ban on direct negotiation with drug companies and use the resulting savings, which could be as high as $30 billion, to further invest in improving health care coverage and quality (footnotes omitted).